PPP Forgiveness: Planning for Financial Statement and Tax Return Impacts
For many of you, the time has come or is quickly approaching for you to consider starting the PPP Loan Forgiveness Application process. Due to the amount of complexity and the importance of preparing your application accurately, we are prepared to support you in the forgiveness application process.
Ways Walz Group Can Support You
- Application Timing Consult – For some of you, applying as soon as possible may not be most advantageous. When potential taxability, financial reporting, potential automatic forgiveness, bank requirements, and bank covenants are considered, delaying your application should be considered and discussed as a viable alternative.
- Review & Comment – We will review the forgiveness application you prepared and provide comments regarding completeness and improvement ideas for your consideration.
- Gather & Provide – We will assist in gathering and/or providing documents, reports, and other
information needed for the forgiveness application process.
- Data Entry & Calculate Loan Amount – We will enter information gathered, calculate the
loan forgiveness amount based on that information, and support you in the completion of the loan forgiveness application.
Financial Reporting Considerations
Note: This “financial reporting” section is most applicable for those PPP recipients who have end-of-year compiled, reviewed, or audited financial statements. If you do not have an issued financial statement prepared under Generally Accepted Accounting Principles (GAAP), the information in this particular section is not as pertinent to you.
For those who do have GAAP-basis statements, it is important to note that, because of the unique nature of the transaction related to PPP funds being advanced and potentially forgiven, there is no specific GAAP guidance on this matter at this point. However, the AICPA (which is not an authoritative, standard-setting body) has indicated options of how to handle the PPP funds.
Primarily, and there is little question to this, the acquisition of the PPP funds are treated as a loan on the balance sheet initially. The matter of when to treat the usage of PPP funds and/or related forgiveness onto the income statement is what we will present below. Companies can choose which presentation they prefer.
- Extinguishment of debt (ASC 470/ASC 405) – Because there are loan documents related to the PPP and the initial recording is as a liability on the balance sheet, the forgiveness of the PPP loan in full or in part may be treated as extinguishment of debt. In this case, the loan is treated as a liability until it is legally released from liability. This would occur when the SBA grants forgiveness.
- Analogous to non-profit grant accounting (ASC 958-605 OR ASC 450-30) – Although many for-profit companies received PPP loans, the AICPA suggests treating the proceeds as a non-profit would. In this case, it is treated as a governmental grant. There are two methods for governmental grant treatment, a conditional contribution or a contingent gain.
o Conditional Contribution (ASC 958-605): Under this method, the liability is removed and contribution recorded once the conditions of forgiveness are substantially met (or explicitly waived). Since the conditions can be substantially met by following the PPP rules, a conditional contribution can be recorded as income incrementally as qualifying PPP expenses are incurred.
o Gain contingency (ASC 450-30): Under this method, the liability is removed and income recorded only when all contingencies related to the grant have been met. The last contingency in this case is the official waiving of the liability, in full or in part, by the SBA. So, this method only allows P&L treatment upon SBA approval, similar to the “Extinguishment of Debt” section above.
- Analogous to international standards (IAS 20) – Domestic American entities that do not need to follow international standards may still use those standards as guidance, per the AICPA’s recommendation. The international standards are similar to the gain contingency above but are less strict. Under international rules, the liability is removed and recorded on the P&L once forgiveness is “probable.” So, an entity that has not yet applied for forgiveness but has spent all of its funds in accordance with PPP guidance may be able to reflect the entirety of its PPP loan on the P&L even without official SBA approval. Additionally, international standards allow the forgiveness to be treated either as an increase to other income or a decrease to the related expenses incurred that led to PPP forgiveness.
- Disclosure – The method of treatment above must be disclosed in the financial statements. We will be working on standard disclosures in order to assist you with this process
Although the CARES Act specifically indicated that any forgiven PPP loan would not be treated as taxable income, the IRS later clarified that any expenses associated with the forgiven PPP loan amount would not be deductible. Not allowing deductions directly associated with the generation of non-taxable income is a long standing IRS position. Congress will need to act on this matter to allow for the deduction of the expenses paid for with PPP forgiven funds. The question is, when are those expenses considered non-deductible?
There is various case law that supports the position that the expenses incurred under the PPP are reimbursable expenses. The expenses incurred do not become non-deductible until the right to reimbursement is fixed and the amount of reimbursement can be reasonably determined. Because the reimbursement is not fixed until the forgiveness is official, the expenses related to PPP usage will not be considered non-deductible until the period in which the SBA officially grants forgiveness and pays the lender the forgiven amount.
This treatment is not guaranteed and Treasury has made no statement regarding the timing of disallowing the deductions. Additionally some may want to accelerate the generation of taxable income and we cannot say for sure whether that is or is not possible.
There appears to be widespread support in Congress for a certain threshold of PPP loan under which the applicant is automatically granted forgiveness. The most common figure is $150,000; however, until Congress acts on this matter, all applicants must officially apply for forgiveness.
In the case of automatic forgiveness, the financial reporting and tax considerations noted above are impacted. Any area where official forgiveness is needed for financial statement presentation or taxability matters will be effected in that forgiveness will become official for applicants under the specific forgiveness threshold as soon as a congressional Act becomes effective.
Timing and Planning
Because of the various aspects of forgiveness on financial reporting and taxability, it is possible that an entity may treat forgivable PPP loans as financial statement income in a different year than when they will endure a tax impact.
Additionally, there are matters that are presently being discussed in Congress, though that body has been slow to act. Automatic forgiveness thresholds and potential deductibility of expenses are two matters that will effect all of the information above.
Absent congressional intervention, here is an example of how these matters could realistically play out:
Assume a calendar year-end, accrual-basis taxpayer receives PPP funds of $500,000 on April 21, 2020 and has a 24-week covered period ending on October 5, 2020. The company had sufficient payroll costs to submit a loan forgiveness application to its lender prior to the end of the 24-week period and did so on August 10, 2020. The lender has 60 days to complete its review and submit its decision to the SBA. The lender takes the full 60 days and submits its decision October 9, 2020. The SBA took until January 7, 2021 to remit payment to the lender. The lender then has an unspecified amount of time to notify the borrower of the amount of forgiveness paid by the SBA and the terms of the remaining loan, if any.
This company would be allowed to deduct its expenses in 2020 and then they would be treated as non-deductible in 2021. Depending on the treatment the client elects for financial reporting purposes, they could treat the entire amount of the PPP loan on the income statement in either 2020 or 2021.
Assuming the same facts as above, but the company did not incur all of their PPP-related expenses until the end of the 24-week period on October 5, 2020. Subsequent IFRs released by the Treasury Department allow up to 10 months to submit a forgiveness application from the end of the covered period. The company decides to wait 10 months and submits a forgiveness application on August 5, 2021. The lender then takes 60 days to submit its decision to the SBA, which occurs on October 4, 2021. The SBA has 90 days to make its decision and remits payment to the lender on January 2, 2022. In this case, the taxable event occurs in 2022 and the P&L presentation can occur in either 2020 or 2022.
Two examples are provided above, but there can be a number of other scenarios depending on your specific situation. In addition, specifically regarding Example #2, the law appears to allow for this long delay in applying for PPP forgiveness; however you should be in contact with your lending institution to ensure a delay in application does not put you out of compliance with the signed PPP loan documents.
We encourage you to consider various planning techniques, and we are available to assist in that regard. Additionally, it may be worthwhile to be intentionally transparent with your lender regarding your anticipated timing of forgiveness and your financial statement users regarding with financial reporting mechanism you are going to use.
Assistance with Forgiveness Application
We anticipate having discussions and communication with you about all of these matters, but you may also reach out to your typical Walz Group contact if you would like our support in the forgiveness application process. We can help you work through the forgiveness process and with determining how we can most appropriately be involved.
We look forward to hearing from you and the opportunity to work with you through the PPP Loan Forgiveness Application process.
Oops…Do You Need to Amend Your Tax Return?
Mistakes happen. Did you miss out on payments or credits on your tax return? Taxpayers can correct returns with errors; however, there are times you should and shouldn’t file an amended tax return.
Accountability in Action with Josh Hoover
Josh Hoover, Walz Group Manager of Tax discusses upcoming individual tax changes for the 2023 tax year.